OCC chief signals new direction on bank supervision, fintech policy

WASHINGTON — The new head of the Office of the Comptroller of the Currency warned that some banks are taking undue risks and signaled a more conservative approach than his predecessors toward fintech firms seeking national bank charters.

In wide-ranging remarks prepared for congressional testimony, acting Comptroller Michael Hsu suggested that some institutions have become too lax in their risk management as the economy charts a path out of the pandemic. He pointed his finger specifically at larger banks.

“I believe the banking system, especially large banks, is at risk of becoming complacent,” he said in testimony that he plans to present to the House Financial Services Committee on Wednesday. The OCC released his remarks Tuesday afternoon.

Hsu, who is scheduled to appear at the hearing with other financial regulators, said that “in a dynamic economy, there is a constantly evolving set of products, practices, and clients that banks avoid, or limit exposure to, based on their risk appetite.”

“In some cases, banks have done the work necessary, developed the risk management capabilities, and put in place the appropriate resources to engage prudently with these products, practices, and clients,” Hsu said. “In other cases, because of market demand and/or a fear of losing client share, banks have set aside their initial risk management concerns and engaged with more risk imprudently.”

“I believe the banking system, especially large banks, is at risk of becoming complacent,” said acting Comptroller of the Currency Michael Hsu.

Hsu, who took the helm of the agency May 10 after working at the Federal Reserve, also suggested a more cautious stance on fintech chartering than previous comptrollers, and indicated that the OCC will focus more aggressively on the impact of climate change on the financial system.

The release of Hsu’s remarks followed a pair of other actions taken by the agency Tuesday. The OCC previously announced that it was halting implementation of most of the key provisions of its 2020 rule reforming the Community Reinvestment. The agency earlier in the day also released its semiannual risk report, which for the first time cited climate change among the significant risks facing banks and the financial system.

In the prepared testimony, Hsu said the agency will scrutinize previous actions such as guidance from former acting Comptroller Brian Brooks endorsing banks’ providing custody services for cryptocurrency firms.

“At the OCC, the focus has been on encouraging responsible innovation. For instance, we created an Office of Innovation, updated the framework for chartering national banks and trust companies, and interpreted crypto custody services as part of the business of banking. I have asked staff to review these actions,” Hsu said.

“My broader concern is that these initiatives were not done in full coordination with all stakeholders,” he added. “Nor do they appear to have been part of a broader strategy related to the regulatory perimeter. I believe addressing both of these tasks should be a priority.”

On how the OCC approaches fintech firms, Hsu said he would prefer a strategy that is more in coordination with other agencies.

To date, the OCC has been out in front developing a special-purpose charter for fintech firms and approving trust charters for crypto companies. But those actions have drawn criticism from some corners, including from state regulators who have mounted legal challenges over the fintech charter.

“My primary concern is that the regulatory community is taking a fragmented agency-by-agency approach to these trends, just as it did in the 1990s and 2000s,” Hsu said.

Agencies should instead work together to establish regulatory standards for tech innovation, he said.

“The key strategic question which the regulatory community must answer collectively is: Where should we set the regulatory perimeter”? Hsu said. “To my knowledge, there is not a shared understanding of the answer to that question and no overarching strategy to achieve it.”

The acting comptroller also argued that reducing inequality “must be a national priority” for financial regulators in the wake of the pandemic. Critical to that effort, Hsu said, is the successful reform of the CRA law.

While the Trump-era attempt to reform the anti-redlining law “took an important step in attempting to improve upon the framework put in place in 1995, I believe there is significant room for improvement,” Hsu said in his testimony. (The OCC announced earlier on Tuesday that it would officially “reconsider” the rule.)

In revisiting the law’s modernization, Hsu said that “all options are under consideration, including rescinding or substantially revising the current rule and working with the Federal Reserve and FDIC on a joint proposal.”

Finally, Hsu said he aims to bolster the agency’s focus on climate change and what the OCC can do to prepare banks in the meantime.

“Banks and supervisors are still developing methods for identifying, measuring, and managing physical and transition risks” of climate change, Hsu said. “Based on my observations, this will not be an easy or swift task.”

Hsu said it was his intention that the OCC would expand beyond the agency’s “approach to date” of simply monitoring “climate change-related developments at banks,” adding that he had “asked staff to build on this approach and develop options for taking more concrete actions.”

“These could include hosting or co-hosting a conference focused on climate change risk management practices at financial institutions, performing a thorough review of our existing policies, and evaluating a range of bank practices relative to identification and measurement, and risk management approaches,” Hsu said

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